Memory is constructive in nature so that it may sometimes lead to the retrieval of distorted or illusory information. Sleep facilitates accurate declarative memory consolidation but might also promote such memory distortions. We examined the influence of sleep and lack of sleep on the cerebral correlates of accurate and false recollections using fMRI. After encoding lists of semantically related word associates, half of the participants were allowed to sleep, whereas the others were totally sleep deprived on the first postencoding night. During a subsequent retest fMRI session taking place 3 days later, participants made recognition memory judgments about the previously studied associates, critical theme words (which had not been previously presented during encoding), and new words unrelated to the studied items. Sleep, relative to sleep deprivation, enhanced accurate and false recollections. No significant difference was observed in brain responses to false or illusory recollection between sleep and sleep deprivation conditions. However, after sleep but not after sleep deprivation (exclusive masking), accurate and illusory recollections were both associated with responses in the hippocampus and retrosplenial cortex. The data suggest that sleep does not selectively enhance illusory memories but rather tends to promote systems-level consolidation in hippocampo-neocortical circuits of memories subsequently associated with both accurate and illusory recollections. We further observed that during encoding, hippocampal responses were selectively larger for items subsequently accurately retrieved than for material leading to illusory memories. The data indicate that the early organization of memory during encoding is a major factor influencing subsequent production of accurate or false memories.